Charging clauses in residential home building contracts

This article considers whether a licensed contractor can insert a charging clause in a residential home building contract.

This question is important because it determines whether a licensed contractor can secure their entitlement to receive payment from a residential homeowner.  A secured entitlement helps mitigate the risk of non-payment.

Charging clauses

In the past, it was a common practice for construction contractors to insert charging clauses in their standard terms of work to secure payment of their fees.  Under these charging clauses, owners would usually grant the contractor an interest in the property the subject of the works. The contractor would then lodge a caveat over the property to record their interest.

This practice was deemed a menace to residential homeowners because caveats were easy to abuse and the practice often led to disputes, some of which had to be settled in expensive court proceedings.  Accordingly, legislation was passed to prohibit charging clauses in the residential context.

Section 7D(1) of the Home Building Act 1989 (NSW) (HBA) now voids any clause in a construction contract for residential building works which purports to give the contractor an interest over any land.

This section is subject to a very limited exception.  The exception covers:

1. a charging clause which creates a charge over the property the subject of the works;
2. the charge is in favour of a licensed construction contractor who is party to the construction contract;
3. the charge secures payment of that contractor under the construction contract, but only where an order or judgment has been made by a court or tribunal; and
4. the order or judgment is made against the registered proprietor of the property.

Note that:

1. all 4 conditions must be satisfied; and
2. if the registered proprietor sells the property, the charging clause ceases to operate.

With proper drafting, your residential home building contracts can contain charging clauses.  Licensed contractors can gain greater peace of mind knowing that their entitlement to payment is secured, at least to the extent the charging clause allows. For example, if the property is the subject of a registered mortgage or mortgages, those registered mortgages may obtain priority for payment as against the builder with a charge.

Vincent Young has been helping clients to address the requirements of section 7D HBA, to the extent possible. Please contact us to discuss how we can assist you today.

This publication is for general information purposes only and does not constitute legal advice. You should seek legal advice regarding your particular circumstances.